Monday, February 18, 2013

Excess cash sitting idle on corporate balance sheets can be the subject of discontent among shareholders.
Corporate notes by Gurmeet Kaur

CASH is king. This mantra applies both to investors and their companies. Having a ton of cash, companies have the opportunity to grow via acquisitions. Money can also be used to squeeze out the competition.

But excess cash sitting idle on corporate balance sheets can be the subject of discontent among shareholders, taking recent developments at Apple Inc as an example.

Apple, perhaps the world's most reknown company as the maker of iPhone, is facing a rebellion from an influential investor, hedge fund manager David Einhorn of Greenlight Capital who wants the company to stop stockpiling cash and instead give some of it back to shareholders.

Apple has some US$137bil (RM423.8bil) in cash and its once rapid growth has slowed in recent years.

The Apple incident raises the old debate: If companies are unable to demonstrate using their cash effectively, would the right thing to do be returning part of it to shareholders?

In the United States and the United Kingdom, there seems to be heightened shareholder activism in this area as a fair share of large companies have been unable to deploy their cash pile because of the slowing economy.

The Apple case has also shifted the attention to companies like Google on whether it should consider doing the same.

Last year in India, Infosys institutional shareholders had called for top-level changes in the company's management and pushed for the return of the company's excess cash to shareholders through either a higher dividend payout or a buyback offer.

The good news, though, is Bursa Malaysia has a number of cash-generating companies that often return cash to shareholders. But, most of these companies have tended to be multinationals. Hence, the high payouts have also been driven as a means for these firms to repatriate their profits back to their parent companies abroad.

Another set of companies that could be doing more for their shareholders are those that may not be generating a lot of cash, but are sitting on a pile of valuable assets. If these companies have no definitive plans for these assets, then shouldn't they be considering unlocking these assets by selling them and returning the money to shareholders?

Property companies come to mind, especially those whose land-banks have yet to be revalued. As a result of not doing much with this land and, by extension, for the shareholders of these companies, these property stocks tend to trade at paltry valuations, despite the rich assets these companies have.

Worse, a few of these property companies have become privatisation targets of the major shareholders. The major shareholders would justify the exercises as being driven by the market not ascribing a high enough value on the companies.

But the converse is also true: The major shareholders, who are clearly in control of the companies, have not done enough to make the assets of their listed companies work to the benefit of shareholders.

So, there is room for more shareholder activism to question the management/ownership of those companies.

There have also been instances where listed companies have deployed excess cash to investing in stocks and trading them an area where they have no competitive advantage and taking an unnecessary risk, according to some quarters, as they would seem to be deviating from the core business.

Clearly, greater vigilance of shareholders would keep management on their toes, whether it is the right strategy to take or should not that surplus money be returned to shareholders for them to decide how they want to use it.

A recent example of attempted shareholder activism ought to be mentioned. This was the case of icapital.biz Bhd where a little-known UK fund, Laxey Partners Ltd, had sought to shake things up at Bursa's only listed closed-ended fund.

In any case, Laxey may have picked the wrong stock to seek a change. icapital.biz's higher performing and well-known maverick fund manager Tan Teng Boo is no easy pushover. Shareholders have been and remain impressed by Tan's returns and do not wish for icapital.biz to end.

But what's noteworthy was this: that Laxey was seeking to have the fund dissolved and the stocks in icapital.biz's portfolio sold and the money distributed to shareholders. By its assessment, icapital.biz should be more proactive in reducing the substantial discount the fund's market price was trading at against its net asset value.

Laxey is symbolic of shareholders who want more from their management. In principle, that behaviour is not only healthy for our market, it is markedly absent.

Fully agree with the comments about the property stocks (and even plantation stocks and other companies) sitting on properties that have not been revalued for years! ( The opposite? Sometimes I laugh so loud on how them REIT managers revalued their properties every few months! )

The clear danger to the shareholders of such companies is that the owners could privatise the stock without the shareholders getting rewarded for their loyalty for being a shareholder and get a fair value of what the stock should be worth.

Pirates?

Exactly.

And on iCap?

Yes, companies should really return excess cash back to the shareholders. If you do not know what to do with the excess money, it's only fair to give it back to the shareholders!

Remember, shareholders are your business partners!

So companies should treat their shareholders as business partners and not as other people's money.

Having said all that, surprise, surprise, surprise but I do not feel sorry for Laxey partner or any shareholders of iCapital who feel disgrunted about iCapital not returning the excess money back to the shareholders.

They really should know better.

When they invest (or speculate) in iCapital, they should not have discounted the TTB factor. If they know who and understand TTB's character, they should have known TTB's character better.

I see many making the assumption that a company is worth investing based on the cash per share yardstick without understanding the company.

In Panasonic Manufacturing Malaysia (Panamy), as highlighted by M.A. Wind
, a huge chunk of money belonging to Panamy is placed (I think LEND is a much better word) to a related company. Yes, Panamy do get interest for the money placed (LEND) but I am amazed why Panamy shareholders aren't asking the simplest question: Why is this related company borrowing money from Panamy at such a cheap rate? (last I checked it was way below 4%!!!)Why aren't Panamy shareholders thinking about it?This is their money and the money lend is massive! It's over 444 million ringgit!!! Why is the money lend to the related company at such a low rate?Don't they rather have the excess money returned to them as dividends?Yes, it's all about money and if you are a shareholder, hey, it's your money. DO NOT BE BLINDED BY THE CASH PER SHARE.Understand the company. Understand what the company does with its excess money.If they are going to be a cash hoarder or worst still, lend your money to a related company at a cheap rate, don't you think that your money is being abused?No?